Earlier this month, we learned that the U.S. trade deficit in goods hit a record high of $1.2 trillion in 2024. President Trump has vowed to determine the cause of our “large and persistent annual trade deficit in goods” and to close the gap. As a mercantilist, President Trump believes that trade deficits are bad and that other countries are responsible for them.

Such mistaken notions have afflicted many sovereigns and elected officials throughout history. Indeed, they had their greatest influence during Western Europe’s mercantilist era from the 16th to the 18th centuries, when most nations thought their wealth depended on running a trade surplus — exporting more than they imported.

The mercantilist view of international trade is often embraced by businessmen, like President Trump. They want their enterprises to generate a surplus, not a deficit. If a business cannot generate a surplus on a sustained basis, then it will be forced to declare bankruptcy. President Trump, ever the businessman, views the U.S. trade balance like the financial statements of a business. But what is true for a business is not necessarily true for the economy.

Contrary to what the mercantilists believe, the negative trade balance in the U.S. is not a “problem” as long as it can easily finance the deficit, which is the case for the U.S. Nor is the trade deficit caused by foreigners engaging in unfair trade practices. By definition, a country’s trade balance is governed entirely by the gap between its domestic saving and domestic investment. If a country’s domestic saving is greater than its domestic investment, like China’s, it will register a trade surplus. Likewise, if a country has a savings deficiency, like the United States, it will register a trade deficit. The United States’ negative trade balance, which the country has registered every year since 1975, is “made in the USA,” a result of its savings deficiency. To view the trade balance correctly, the focus should be on the domestic economy.

Both the public and private sectors contribute to the trade balance through their respective savings–investment gaps. The total trade balance is the sum of these two gaps. In the United States, the private sector actually generates a savings surplus, that is to say, private savings exceed private domestic investment, which reduces America’s overall trade deficit. By contrast, the public sector generates a cumulative savings deficiency — that is to say, government domestic spending exceeds government savings, resulting in fiscal deficits — that is almost twice the size of the private-sector surplus. significantly, the private-sector surplus is overwhelmed by the public-sector deficit. Clearly, then, the U.S. trade deficit is driven by the government’s (federal, plus state and local) fiscal deficits.

The straightforward implication of this analysis is that President Trump can bully countries he identifies as unfair traders and can impose all the restrictions on trading partners that his heart desires, but it won’t change the trade balance. If President Trump were truly interested in eliminating the trade deficit, he could easily do so by balancing the federal government’s budget.

The gulf between the notions of do-it-yourself economics and orthodox economics is widest in the sphere of international trade. President Trump is one such example.